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Victor Stanley II - from spoliation to the slammer

In Victor Stanley, Inc. v. Creative Pipe, Inc., No. MJG-06-2662, 2010 U.S. Dist. LEXIS 93644 (D. Md. Sept. 9, 2010) (“Victor Stanley II”), the latest in a recent trend of must-read e-discovery opinions, Magistrate Judge Grimm* confronted what he described as “the single most egregious example of spoliation that [he] ha[s] encountered in any case that [he] ha[s] handled or in any case described in the legion of spoliation cases [he] ha[s] read in nearly fourteen years on the bench.” Id. at *60. While a complete recitation of the four-year procedural and factual history leading up to this decision is beyond the scope of this Alert (indeed, it spanned 35 pages of the 89-page opinion), the Court identified eight discrete preservation failures, each of which “demonstrate[d] intentional misconduct done with the purpose of concealing or destroying evidence.” Id. For instance, Defendants failed to implement a litigation hold, failed to preserve files and emails even after Plaintiff demanded preservation, and intentionally deleted electronically stored information (“ESI”) despite repeated admonitions by the Court of the need to preserve relevant materials and produce them to Plaintiff. Id. at *11. The Court ultimately granted Plaintiff default judgment as to liability on the primary cause of action (copyright infringement of furniture designs), imposed a permanent injunction on that claim, awarded Plaintiff attorney’s fees and costs allocable to spoliation, and most notably, found Defendant Mark Pappas in civil contempt of court, punishable by two years in prison unless he paid Plaintiff the fees and costs awarded.

Spoliation Sanctions Analysis

While the largely undisputed reprehensible conduct at issue in Victor Stanley II would ordinarily make for a relatively open-and-shut decision, Magistrate Judge Grimm took the opportunity to provide detailed guidance on the analysis required to arrive at the proper sanction. In fact, after bemoaning the “lack of a uniform national standard governing when the duty to preserve potentially relevant evidence commences, the level of culpability required to justify sanctions, the nature and severity of appropriate sanctions, and the scope of the duty to preserve evidence” (id. at *65-*66), the Court went so far as to append to the opinion a 12-page chart delineating the preservation and spoliation standards in each judicial circuit. The framework the Court applied to evaluate the appropriateness and level of sanctions was as follows:

First, there must be a duty to preserve evidence and a breach of that duty. It is well established that the duty to preserve arises as soon as litigation is reasonably anticipated and that the duty extends to documents in a party’s possession, custody or control, but, as the accompanying chart makes clear, the definition of “control” varies by circuit.

Second, there must be some level of fault. Once again, the degree of culpability—ordinary negligence, gross negligence, willfulness, or bad faith—varies by circuit.

Third, the lost evidence must be relevant and the loss must be prejudicial to the party alleging spoliation. Evidence is relevant if “a reasonable trier of fact could conclude that the lost evidence would have supported the claims or defenses of the party that sought it.” Id. at *121-*122. Prejudice exists when “the party claiming spoliation cannot present ‘evidence essential to its underlying claim.’” Id. at *123.

Finally, assuming the first three elements have been satisfied, the extent of prejudice and degree of culpability will dictate the proper sanction, with the proviso that “[t]he court must ‘impose the least harsh sanction that can provide an adequate remedy.’” Id. at *130. While the case-dispositive sanctions of dismissal or default judgment are reserved for the most severe instances of spoliation, the less draconian adverse inference jury instruction is oftentimes equally damaging in practice. Additionally, a party can be found in contempt of court under Federal Rule of Civil Procedure 37(b)(2)(A)(vii) and pursuant to a court’s inherent authority if it is established, by clear and convincing evidence, that the party had actual or constructive knowledge of a court order and knowingly violated it to the detriment of the non-moving party. Id. at *145-*146.

Key Takeaways

The opinion is instructive for both lawyers and litigants in a number of additional respects. For instance, while the fact pattern presented did not require the Court to delve too deeply into these issues, the Court reaffirmed the need to consider both reasonableness and proportionality in evaluating parties’ document preservation and production efforts. Id. at *88-*89 (“assessment of reasonableness and proportionality should be at the forefront of all inquires into whether a party has fulfilled its duty to preserve relevant evidence”); see also Rimkus Consulting Group, Inc. v. Cammarata, 688 F. Supp. 2d 598 (S.D. Tex. 2010).

Furthermore, the Court makes clear that a party cannot escape sanctions by pointing a finger at its outside counsel, explaining that “[i]nsofar as Plaintiff alleges spoliation by the attorneys who represented Defendants earlier in this litigation, Defendants’ previous attorneys acted as Defendants’ agents” (id. at *63) and “[t]herefore, any such spoliation is attributable to Defendants.” Id. It is thus critical that companies retain outside counsel with a thorough understanding of the e-discovery landscape and that parties maintain an open line of communication with their counsel on all e-discovery matters throughout the lifecycle of a case.

For those who litigate in the Southern District of New York, the Court repeatedly emphasized the potential “chain reaction” that could take place in light of that district’s willingness to presume relevance and prejudice when a party exhibits gross negligence, paired with the finding in Judge Scheindlin’s seminal Pension Committee decision that a party’s failure to issue a written litigation hold notice automatically constitutes gross negligence. See Pension Committee of the University of Montreal Pension Plan, et al. v. Banc of America Securities LLC, et al., 685 F. Supp. 2d 456, 471 (S.D.N.Y. 2010). In short, a party that neglects to circulate a hold notice may be susceptible to sanctions, at least in the Southern District of New York, even absent any factual showing that relevant evidence was lost or that the loss prejudiced the moving party.

The only overtly troubling component of the opinion was its rumination that the actions of “a sympathetic though negligent party” may be more likely to warrant case-dispositive sanctions than a party guilty of “intentionally egregious conduct” where the sympathetic party’s conduct happens to result in greater prejudice. This section of the opinion runs counter to the notion that litigants who proceed in good faith are generally spared severe sanctions, and it will be important to monitor future decisions to see how much weight courts place on this language.